We may have been caught in the world financial market contagion arising from European and US sovereign debt difficulties combined with the prospect of weak growth. But we’ll get through the current soft patch in the economy.
Meanwhile, these disruptions are distracting attention from something more important for the medium term – namely, the impact of the resources boom on the rest of the Australian economy.
We are being asked to “make room for the minerals boom”. But is it for the greater good? What happens when the minerals boom ends? We need to prepare by focusing on productivity- enhancing infrastructure investment.
The resources boom is driving structural change through the impact of the Australian dollar on competitiveness.
Strong resources prices, with minerals investment underpinning growth and hence interest rates relative to other developed Western economies, have led to a strong Australian dollar damaging domestically produced trade-exposed goods and services. And that’s driving structural change.
Mining-related industries are strong. But domestically- produced trade-exposed goods and services are contracting. Put simply, they can’t compete at this level of the currency. It’s about relative wages. It affects both export and import-competing industries. Manufacturing, secondary processing, agriculture, inbound and outbound tourism, education services and other trade-exposed services have been badly affected. They will continue to contract while ever the dollar remains high.
“Surely, we can put our minds to doing the things that will soften the blow. Now. While we still can. Rather than just blowing the dough”
Meanwhile, with the spectre of skilled labour shortages and capacity constraints two years hence, Australian interest rates tightened earlier and from a higher base than overseas markets, suppressing interest-rate-sensitive sectors such as housing.
And financial market fears plus political uncertainty are hit- ting confidence. A mining tax will do little to discourage investment in this buoyant resources period. The carbon tax is a bit player – it’s the strength of the dollar that is doing the damage to trade-exposed sectors.
The recent job losses (export steel, Qantas) are just the most recent, albeit larger and highly visible, in a long line of activities and jobs being shifted offshore. For several years now, the newspapers have been recording examples, mainly due to the dollar but partially also due to the GFC-induced downturn
in the Australian economy. A food processing facility here, a manufacturing operation there, and weakness of tourism and services everywhere.
It’s not as though this is a new phenomenon. We’ve been losing bits of industry for the past 30 years, every time the dollar goes too high.
The contraction of trade-exposed industries will continue as long as the Australian dollar remains high.
Never underestimate the importance of the currency in determining where things are produced. We think that the Australian dollar is reasonably valued from the point of view of a competitive domestic tradeables sector, on average at around 75 to 80 US cents.
The domestic trade-exposed industries are the sacrificial cow on the altar of mining profits. We are being asked to “make room for the minerals boom” for the good of the country. But is it for the good of the country? Certainly, it’s a positive for the profits of the mining companies. But it’s the trade-exposed industries that have to pay the piper.
That’s not a criticism of the miners – they’ve had a long and difficult history, punctuated by short booms, before the cur- rent long and strong boom. Rather, it’s a recognition that their current good fortune comes, at least partially, at the expense of other parts of the economy.
Mind you, there’s not much we can do about the Australian dollar. The RBA “knows” that they can’t successfully intervene.
This is a free-floating dollar in a free enterprise economy. We’re stuck with the high dollar, at least while commodity prices remain s ohigh.
Markets operate on short-term financial logic. And that’s the logic driving structural change. But we need to leave a healthy economy for our grandchildren. The resources boom won’t last forever. Structural change is a medium-term, largely irreversible, process. Once the skills are gone, no amount of new investment will bring the activity back. It will leave us vulnerable once the stimulus of minerals investment, as the driver of growth and high commodity prices to boost the trade balance, has ended. We’ll need to find another source of income to pay for our imports, or produce more of what we consume.
The current overseas malaise should be a lesson to us. Surely, we can put our minds to doing the things that will soften the blow. Now. While we still can. Rather than just blowing the dough.
The minerals boom is not costless. Hence the importance of resources taxes to prepare the economy for the end of the boom. But what should we do?
We can’t expect any significant protection or government intervention in the operation of the market. And I don’t think our bureaucrats and politicians remember what the term “industry policy” means.
People have been decrying the weakness of productivity growth this decade. They talk about it as if it comes automatically. It doesn’t. We have to earn it.
In the 1990s, it came through changes in work practices as we worked smarter and, incidentally, harder. I’m not sure there’s a lot of room to work harder now.
